Thursday, March 1, 2018

Currency (and Cryptocurrency) Wars for Real?

The term Currency Wars has been used quite a bit in recent years to describe a situation where countries actually try to use devaluation of their own currencies against each other in an effort to stimulate domestic exports. Jim Rickards even wrote a popular book on the subject.

A question we might raise based on what we are seeing in the news lately is if we are seeing new "Currency Wars" alongside "Cryptocurrency Wars" for real? In this case we are not just talking about countries trying to gain a trade advantages, we are talking about about actual economic attacks on efforts by countries to find ways to bypass the US dollar. Some are wondering if the recent moves by Venezuela and Iran mentioned inthis recent article will ramp up these new (and different) kinds of "currency wars" even more. Let's take a look at it below.

"There are fears that the rise of state-backed cryptocurrencies could pose a challenge to international efforts to regulate financial transactions and impose sanctions. The countries most interested in the technology – Iran, Venezuela and Russia – are all targeted by U.S. sanctions.

The Treasury Department has warned that U.S. citizens purchasing these currencies may be violating sanctions laws. And just last month, Treasury officials told Congressthat rogue states and international criminal organizations are using virtual currencies "to launder their ill-gotten gains."

In a recent email discussion on this news, one the the experts I hear from on issues like this offered this comment:

"Fascinating. One aim - the main aim? - apparently is to "skirt" US sanctions. What will the US do? If the US criminalises use of such a currency who is going to accept it? I was prompted to look up the US Treasury sanctions website -- what a bureaucracy! It seems there are some 24 countries on the list. If Congress/Admin expands the use of sanctions, further incentives to create alternative currency would clearly grow."

This thought suggests that the US and these other nations looking for ways around US sanctions and alternatives to the US dollar as global reserve currency are taking this new kind of "currency war" quite seriously. How seriously? Take a look at this statement on the US Treasury web page regarding US sanctions now in place:

551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808?

A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk. [1-19-2018]

There are some who believe that it is so important to the US for the US dollar to remain the primary global reserve currency that the US would go to an actual shooting war over that issue if it felt threatened enough to warrant that. For now, it appears that the battle over currencies (and now perhaps state sponsored cryptocurrencies by unfavored nations) will be fought with things like sanctions and tariffs. But this situation does bear watching as more and more nations around the world look at ways to bypass sanctions and undermine the role of the US dollar as global reserve currency. I would imagine that Russia and China are paying close attention.

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